Blog: Budget adds seasoning to PIEs

by David Chaplin

Monday, 24 May 2010

The biggest, and best, news for savers in the latest budget was the reduction in PIE tax rates in line with marginal income tax levels.

This was something of a relief for the savings industry, which was slightly nervous the government would remove the tax incentives for investing in PIEs.

In effect, Bill English has maintained the PIE status quo, enabling medium to low income-earners to apply their marginal tax rates to investment returns and aligning the top PIE rate with the new company tax of 28%.

As it stands, the incentives to invest in PIEs for those on the new top tax rate of 33% will only be slightly less attractive than currently where the highest marginal rate is 38% versus the maximum PIE tax of 30%.

Products such as the popular cash PIEs will remain on the menu.

The changes also apply to the withholding tax rates levied by banks and other financial institutions, which the government says will automatically adjust once the new rates become effective in October.

As I discussed in a previous blog the bank withholding tax rates have only recently been aligned with personal tax rates but those on the lowest tax rate, which drops to 10.5% from 12.5%, will have to alert their financial institution about their status, as will those in KiwiSaver schemes, if they haven't done so already.

The tax reduction is also a fillip for KiwiSavers, who should see higher long-term earnings as a result. Compared to Australia, where super earnings rates enjoy a substantial tax incentive, this is relatively minor but it's better than nothing.

The government estimates that after the changes "a worker earning $48,000 a year who joins KiwiSaver at age 25 will be over $11,700 better off upon reaching the retirement age of 65″, which doesn't really sound like much in the context of 40 years of saving but rather you get it than them.

Curiously, the government release also includes a free ad for banks where it says if the same worker threw all their tax cuts into a term deposit "they would be $78,000 better off upon retirement".

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